According to the Report on Trends and Progress of Banking in India, released today, the spread of universal banking ideas will bring to the fore issues such as mergers, capital adequacy and risk management of banks. It also raises a challenge for development financial institutions (DFIs) on managing the maturity mismatch in assets and liabilities.

"The emerging scenario in the Indian banking system points to the likelihood of the provision of multifarious financial services under one roof. This will present opportunities to banks to explore territories in the field of credit/debit cards, mortgage financing, infrastructure lending, asset securitisation, leasing and factoring. At the same time it will throw challenges in the form of increased competition and place strain on the profit margins of banks", the report says. The report says one of the most significantstrategic challenges facing DFIs is the ability to raise low-cost funds. However, with the drying up of low-cost (long-term operations) funds from the RBI and other sources, the DFIs have been forced to go into the domestic and international markets to raise resources at market-determined rates. Secondly, they have started competing for business in the same segments as banks, namely, the households. Consequently their spreads have been under pressure. Such a squeeze on margins would necessitate a pro-active focus on portfolio quality and cost management.

"The comparative advantage or disadvantage of DFIs vis-a-vis banks in this regard depends to a large extent on the quality of their portfolios, the accounting policies that are practiced and personnel management. The banks, on the other hand, have a competitive edge in resource mobilisation through the route of retail deposits.

However, there would now be greater competition for funds with the entry ofprivate banks, non-banking financial institutions andmutual funds", the report said. The RBI has identified certain regulatory issues that need to be addressed to make harmonisation of the needs of commercial banking with institutional banking successful. First, banks are subject to CRR stipulations on their liabilities. DFIs, on the other hand, face no such pre-emptions on their funds. Secondly, although instrument-specific restrictions on resource mobilisation by DFIs by way of term deposits, term-money borrowings, CDs and inter-corporate deposits have been replaced with umbrella limits, DFIs do not enjoy the advantage of branch network for resource mobilisation. This in effect curtails DFIs' ability to raise low-cost deposits.

Thirdly, with the larger part of new loans going to capital-intensive projects like power, telecom, etc., the DFIs would need to extend loans with longer maturities. On the other hand, due to interest rate uncertainties, DFIs are finding it attractive to raise more of short-term resources.

"Due to their past borrowings oflong-term nature, the mismatch is still in their favour. This, however, raises a challenge for the DFIs to manage the maturity match of their assets and liabilities on an ongoing basis", the report concluded.